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The crisis in the commercial real estate sector creates a perfect storm for dozens of banks in the United States (and the world)
Mon, 04/01/2024 - 15:16

Mariano Sardáns

Mariano Sardáns
Mariano Sardáns

Socio de FDI Gerenciadora de Patrimonio

The crisis in the commercial real estate segment in the United States is impacting the balance sheets of the banks that granted loans for the purchase of this type of property. Office buildings and shopping malls are having occupancy problems and the value of these properties has not recovered its pre-pandemic value.

To measure the crisis, last October it was estimated to be 1.5 trillion dollars, which is approximately equivalent to the sum of the gross domestic product (GDP) of Argentina, Chile, Peru and Colombia. The crisis deepened so the estimated value today is much higher.

For some time now we have seen banks creaking. The Federal Deposit Insurance Corporation (FDIC) indicated that there are 52 entities in trouble in the last quarter of 2023 and the situation is not improving. Days ago the alarm sounded even louder due to the sharp drop in the stock of New York Community Bank (NYCB), a bank with high exposure to commercial real estate.

Although some large-scale companies are returning to in-person work, many small businesses are not doing so nor do they plan to do so anytime soon. This causes semi-empty buildings whose owners today cannot generate sufficient rental income to meet the monthly payment of bank loans. In all cases we are talking about properties that if they were sold today, the property would not be able to cover the amount owed. The latter is precisely the factor behind the crisis of these banks.

There are banks that have 40% of their investment portfolio in commercial real estate. Their exposure to this situation is very high and SPOILER , many will not survive.

Vacancy rates for offices and commercial premises are the highest in years. The COVID-19 pandemic accelerated the implementation of the home office format and in general terms the credit crunch, higher interest rates and inflation made construction and real estate less attractive. Panorama that aggravates the situation since there is no recovery in the sector but rather a deepening.

Europe is not immune to the problem. A recent Morgan Stanley report notes that major European banks have cut their commercial real estate lending even though they have half the exposure of their U.S. counterparts. It is the worst crisis in the sector since 2008-2009. In Germany, office occupancy fell to 40% from 61% pre-pandemic.

The situation in China is worse, due to this and other issues that we will not address in this analysis. Just to add some data, five large banks also reported worrying results days ago due to the real estate sector.

The situation is complex. It is read that the value of office buildings in large cities is currently trading at less than half their pre-pandemic price.

Some rating agencies believe that there will soon be a massive bank collapse. Days ago, Fitch warned of a catastrophic collapse of the office real estate sector that eclipses the 2008 financial crisis and puts hundreds of banks at risk.

NYCB's $1.05 billion capital raise helped stem the decline in its stock value and alleviate some near-term concerns, but exposure to New York's rent-controlled multifamily properties (apartment buildings with more of four units) remains a problem.

Some tips to keep in mind: do not leave amounts greater than the FDIC insurance limit (US$250,000) in banks and consolidate your financial assets in brokers , where there are various ways to insure 100% of the capital and its interests.

Faced with a bleak outlook, it is important to seek advice to minimize contingencies and maximize opportunities. The only thing that is certain is change, today commercial real estate suffers, tomorrow it will surely be another sector.